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Treasury Works to Revamp Tobacco Bonds, Ease Strain if Budget Falls Short

Creative refinancing could improve state's bottom line by $250 million amid concerns former Gov. Chris Christie’s last budget won't meet revenue projections

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Gov. Phil Murphy has been in office for only a few weeks, but there are already concerns the state budget he inherited from former Gov. Chris Christie — in place until June 30 — may come up short. Against that backdrop, Murphy’s administration has started to work on a creative refinancing issue involving revenue from the tobacco industry that could provide some breathing room.

The state Department of Treasury issued a request for proposals last month from firms seeking to serve as underwriters for a proposed 2018 refunding issue, and earlier this week Treasury announced it was moving ahead by selecting two firms, Citigroup and Jeffries.

It’s too early to say exactly how much money the state could save by refinancing a group of bonds backed by the state’s share of tobacco-settlement revenue that were issued more than a decade ago, but the bonds are all “callable,” meaning they are eligible to be refinanced before they reach maturity. A proposal that Christie’s administration received from Bank of America just before he left office suggested the refinancing could yield some $250 million in immediate savings under today’s bond-market conditions.

Moving on this ‘right away’

“The reason we’re moving on this right away is because the bonds are callable so right now they’re paying a higher yield to investors than the market yield,” Treasury spokeswoman Jennifer Sciortino said. “Since the savings are apparent, there’s no reason to wait.”

It’s been two decades since the tobacco industry reached a significant legal settlement with New Jersey and dozens of other states to resolve legal claims related to cigarette smoking. The settlement promised the states hefty annual payments from the tobacco industry, totaling more than $200 billion spread out over several decades. Subsequently, some states, including New Jersey, decided to issue bonds to collect money from investors up front, with the promise that they would be repaid over time, with interest, as the tobacco money comes in each year.

Bank of America’s proposal, which was obtained by NJ Spotlight through a recent public-records request, outlined an opportunity for the state to refinance more than $3 billion in callable tobacco bonds, with the potential to generate at least $250 million in savings during the current fiscal year, which runs through the end of June.

Christie’s administration faced some criticism in 2014 for its handling of a smaller tobacco-bond transaction, and it’s unclear what work, if any, his administration did after it received the Bank of America proposal, which was dated January 2018. But Murphy’s administration got to work right away on the proposed refinancing issue, putting out the request for proposals, or RFP, from underwriters on January 17, just one day after he took the oath of office in Trenton.

Nine firms submitted proposals

Treasury announced on Monday that nine firms submitted proposals, and that Citigroup and Jeffries were selected to serve as joint senior-managing underwriters for an envisioned 2018 tobacco-settlement refunding issue. Treasury anticipates the issue could go to market in late March or early April.

Any savings from a tobacco-bond refinancing would come at a good time for Murphy, a Democrat, as he’s now in charge of the $34.7 billion state budget that the Republican Christie signed into law last July. In the State of the State message he delivered to lawmakers in early January, Christie bragged about improving the state’s deeply strained finances during his eight-year tenure. But Christie was prone to overestimating revenue collections throughout his two terms, and some new signs of budget trouble have emerged since he left office last month.

The latest official revenue report, released by Treasury in early January, indicated overall tax collections were ahead of projections as of the end of December. However, a notice issued in late January by Wall Street credit-rating agency Moody's Investors Service suggested there may have been a slight shortfall at the end of December, as the state reached the halfway point of the 2018 fiscal year. Treasury's tax-collection figures were inflated, in part, by gas-tax receipts that are constitutionally dedicated to funding only transportation projects, Moody's said. Income-tax collections also surged thanks to a tax-repatriation provision for hedge-fund managers, and the broader federal tax-code changes that were enacted at the end of 2017, suggesting there could be a coinciding decrease come April, the rating agency said.

Overoptimistic forecasting of revenue

Meanwhile, a report Murphy received late last month from a group of fiscal experts that were assembled to review state budget issues for his gubernatorial transition also warned of a possible budget gap from “forecasting of revenue that may have been too optimistic, spending money not included in the appropriations, and expecting savings that didn’t materialize.”

Among the concerns listed in the transition report was $200 million in spending on programs to combat opioid addiction that was pursued by Christie outside of the original budget adopted by lawmakers in July. The state Department of Transportation was also likely to blow through a $10.4 million budget for winter-storm operations, as such spending has averaged more than $60 million for the last five years, the report warned.

While it’s unclear exactly how much savings the Murphy administration may realize by refunding tobacco bonds, Sciortino, the Treasury spokeswoman, said the $250 million estimate floated in the Bank of America proposal was “another indicator of why this is a smart move out of the gate.”

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